Florida lawmakers will enter the 2009 legislative session fixated on the state's economic woes and how to balance a state budget that keeps running in the red.

But this year's session could be far-reaching for the state's insurance industry as well. The explosive news that State Farm, the state's largest private insurance carrier, has decided to pull out of Florida's property market over the next two years threatens to transform the 60-day session into an all-out battle over insurance issues. Any number of actions could have dramatic consequences on the property and casualty market.

Senate President Jeff Atwater (R-North Palm Beach), had already signaled that he is willing to tackle several thorny items, including the size and scope of the Florida Hurricane Catastrophe Fund and whether Citizens Property Insurance Corp. should end its rate freeze.

When asked at a recent forum with business leaders about another insurance landmine, he was less forthcoming. Atwater refused to predict whether lawmakers would deal with the recent Supreme Court ruling (Emma Murray v. Mariners Health/ACE USA) that upended the workers' compensation market.

The situation in the House is even more uncertain. House Speaker Ray Sansom (R-Destin), stepped down from his duties in the wake of an ethics investigation, a move that thrust Rep. Larry Cretul (R-Ocala), into the post. But Cretul has spent his first few weeks as the House leader getting a better understanding of the state's dire finances instead of diving into insurance matters.

While the GOP remained in firm control of the Florida Legislature following the 2008 elections, insurance legislation will not be settled in a strictly partisan fashion. The final decisions that emerge from this year's session will be guided by other factors, such as geography and the prevailing political wisdom at the time.

Some Republicans, for example, remain skeptical of state intrusion into insurance matters, while other GOP lawmakers say a souring economy is not the time to lift state regulation. Gov. Charlie Crist, who will have veto power over whatever lawmakers approve, has generally shared the latter viewpoint.

Sometimes the prospect of legislative discord results in inaction; the idea of leaving a messy controversy unresolved until another time begins to look enticing as problems mount. The property insurance challenge, Citizens, and the Cat Fund come to mind. But some top Republicans say that it is too risky to wait to address these issues in the hopes that the state escapes another punishing hurricane season.

"I think this is one of the most potential significant risks to the Florida economy," Sen. J.D. Alexander, a Lake Wales Republican who is chief of the Senate budget committee, said about the looming shortfall in the state's Cat Fund.

And while property insurance issues and perhaps workers' compensation will draw the most attention, there will be dozens of proposed bills that impact the state's insurance industry, addressing everything from health insurance coverage to whether drivers should be forced to put down their cell phones when behind the wheel.

In the end, the only bill that lawmakers are obligated to pass is an annual state budget. But even that could have ramifications for those who follow insurance. There is mounting pressure for new revenue sources, and lawmakers may also choose to divert money that now pays for the regulation of the insurance industry. The issue of taxing insurance products or services also could rise again this year.

Agent associations and industry groups are vitally interested in and involved with the legislative process. Four of the major players present their views of the issues they believe deserve attention during the 2009 session.

Bad Odds for Cat Fund

By Gary Landry, vice president, Florida Insurance Council

Florida's public policy for financing hurricane losses seems to have been dreamed up in another sunny state — Las Vegas. Our state's policy for financing storm losses is tantamount to betting the house and our life's savings on one wild Nevada crapshoot.

It has taken a while for Florida taxpayers to fully comprehend the ill-conceived public policy adopted by lawmakers over the past two or three years and the huge financial liability that policy has placed on their backs, but they understand it now and, to say the least, they are not happy about it. They like even less the fact that it effectively forces working class inland residents to subsidize multi-million dollar coastal homes creating an "us versus them" mentality that is good for no community.

The wild card in the scenario being played out before us is the real villain — hurricanes. Florida, fortunately, has been spared from any major hurricane impact the past three seasons after being devastated by eight back-to-back hurricanes during the 2004-2005 seasons. However, it's not a question of if we are struck again; it's a question of when. The even bigger question is, will the state be financially prepared?

Clearly, the answer is "no". The Florida Hurricane Catastrophe Fund (Cat Fund) created following 1992′s Hurricane Andrew, was repeatedly tinkered with over the past couple of years, to the point that it is financially incapable of coming close to meeting its obligations, should disaster strike. That has a direct impact on every homeowner in the state.

In addition to obligating the fund way beyond its means, lawmakers forced private insurers to utilize the fund's unrealistic capacity as a financial backstop. The purpose of the Cat Fund is to provide ready access to cash to immediately pay claims following a major storm strike. However, the fund's inadequate surplus of dollars and its inability to raise the cash in a timely manner could severely jeopardize this process.

Bad Public Policy

Then there's the government-created Citizens Property Insurance Corp., which has now grown to be the largest single property insurer in the state with more than one million policies. Almost half of the cash Citizens would need to pay claims in the event of a major hurricane are designed to come from the Cat Fund — and, as just noted, the fund doesn't have the cash on hand. Further, the director of the Cat Fund has testified before the Florida Cabinet and the House and Senate that current financial market conditions have made it impossible to raise the cash.

Neither the troubled Cat Fund nor the topsy-turvy financial markets are to be cited as the root cause of our hurricane-financing dilemma, however. What is at fault is the public policy that has forced the Cat Fund to far overreach its ability to pay. That bad policy was driven by a priority philosophy of artificially holding down rates of insurance premiums without regard to the impact of that rate suppression to the stability or financial solvency of our financial mechanisms for paying for storm losses.

Despite the gloomy outlook, there is good news emerging out of the state capital. A new crop of legislators is coming to town this year following the November election cycle. Many of them heard their constituents' displeasure regarding the flawed policy as they campaigned last summer and fall. Many returning lawmakers also are bringing with them a change of heart as a result of the campaign season.

Floridians want realistic, sound solutions to the hurricane-financing crisis we face. They have had enough of the political solutions of recent years.

Lawmakers of every political stripe, from all corners of the state, are moving away from the rate suppression philosophy that got us into this mess. They have pledged to work to find the proper balance that will bring stability to the property insurance market and keep rates affordable.

Rate Freezes Must End

Among those solutions being talked about is an end to the unwise rate freezes that are producing too little premium for the growing risk, and the restoration of a realistic Cat Fund. Rates must be allowed to match the risk. The longer we put it off, the larger the disparity grows and the harder it will be for homeowners to absorb the cost when the day of reckoning finally comes.

The Cat Fund must be as large as possible without overreaching its cash on hand or its ability to readily access cash to meet its obligations to both Citizens and to private insurers that rely upon the fund as a stable financial backstop.

With a realistic Cat Fund, companies will have to seek other financial backstops in the private reinsurance market. That will mean higher costs that companies must be allowed to pass on — something that flawed public policy of recent years refused to allow, giving companies no other choice but to reduce the number of policies they can write. That reduction led to the massive growth of Citizens and to the availability problems that plague us to this day.

Senate President Jeff Atwater (R-North Palm Beach) has come up with a reasonable plan to transition to rate adequacy through what he terms a "glide path" that allows rates to rise in a series of steps to ease the financial impact on homeowners.

The insurance community supports these solutions and is eager to work with all of our public officials in reversing the Vegas-like policy that got us where we are today. The last thing our state and our economy need to hear is that Elvis has left the building and the insurance industry has left with him.

STOLI is Best Left to Vodka

By Bob Lotane, communications and political affairs director, National Association of Insurance and Financial Advisors – Florida

In an early look toward the 2009 legislative session regarding insurance issues, it appeared things would be relatively quiet on the property insurance front. That certainly changed with State Farm's withdrawal announcement and the release of the report from the Citizens Property Insurance Corp. Mission Review Task Force. Both of these issues are significant to Florida's insurance industry and residents, and we hope lawmakers will seriously consider all the ramifications of the proposals that will surely be presented to them.

In the life insurance arena, the National Association of Insurance and Financial Advisors (NAIFA) has long been in the vanguard of working to limit the threat we see to both consumers and the industry from stranger originated life insurance (STOLI). Thankfully, Insurance Commissioner Kevin McCarty saw the need to investigate STOLI's potential effects on the market, and last year held a comprehensive informational hearing on the subject.

New STOLI Regulations

This led the Office of Insurance Regulation to provide legislative language to the House and Senate for this session that contains many provisions of the National Association of Insurance Commissioners (NAIC) Viatical Model Act. The viatical model was amended to address STOLI, and we look forward to debate about how STOLI should be regulated in Florida.

In STOLI deals, investors induce seniors to purchase life insurance, loan them money for the premiums, and after the two-year contestability period, assume ownership of the policy. The sooner the person dies, the more profitable the death benefit that the investor(s) collects. Consumers lured into such deals are often unaware of the tax consequences and legal fees. Additionally, they are using up their insurance capacity, which may be needed for future estate planning. STOLI schemes also are expensive to monitor and detect.

The current NAIC model contains many sober features, such as a five-year settlement prohibition on deals that contain STOLI features like life expectancy evaluations, non-recourse financing and settlement guarantees. It protects consumers who have self-financed their premiums and want to sell their policy after the two-year contestability period or at any time for causes such as death of a spouse, divorce, disability, bankruptcy, loss of job, or terminal illness. It prohibits ads that identify insurance as "free" or "no cost," and it establishes reporting requirements to help regulators identify and stop STOLI transactions.

With our large senior population, life insurance is vital to our state. In 2006 alone, individual life insurance coverage purchased by Floridians totaled $120 billion and group coverage amounted to over $380 billion.

With massive budget deficits at the federal level, Congress has its eye on all sources of revenue, and the tax-exempt buildup inside life insurance policies has not escaped its gaze. In fact, NAIFA-Florida discovered a congressional study that conservatively estimated this buildup over the next five years at $1.5 trillion. Amazingly, this study referred to this as lost revenue.

Taxation of life insurance products would be disastrous. The death benefit received by a widow or an annuity benefit to a retiree must not be reduced for seniors living on fixed or limited incomes. NAIFA began this fight almost 100 years ago when the first income tax code included taxes on life insurance. NAIFA worked personally with President Woodrow Wilson to draft amendments to insert vital tax advantages into these products. The bottom line is this: If life insurance becomes the product of Wall Street fat cats rather than a benefit for widows, orphans and business planning, then Congress will remove its tax advantages.

Taxes, Churning, and Penalties

Another issue in which we will be very involved this session is senior annuity suitability. This follows passage of legislation last year that required a comprehensive analysis when selling annuities to seniors and imposed stiffer penalties for "twisting" or "churning" and for fraudulent use of signatures.

Florida's CFO Alex Sink formed the Safeguard Our Seniors Task Force last year, which held meetings across the state to hear testimony, both pro and con, about annuities and other issues involving seniors and insurance. She would like to see even stiffer penalties for abusive annuity sales practices involving seniors because prosecutors are not as likely to take cases that do not carry felony violations (current law classifies these as first-degree misdemeanors).

We continue to support Sink in her efforts to go after the few bad apples who purposefully defraud seniors. However, in assessing the level of penalty that such actions warrant, we also believe that severe penalties require severe tests as to how and when they are imposed, so the wording and details of any emerging legislation will be very important. What we do not want to see is a young or inexperienced advisor facing a jail sentence due to an honest error or because of poor training.

With the desperate budget situation facing lawmakers, we anticipate that all spending and revenue proposals will be considered, and that could include sales taxes on services. Those potentially subject to such a tax dodged a bullet last year when ballot language calling for such taxes was judged to be unconstitutional. Prior to the ruling, NAIFA-Florida obtained pledges from a number of senators and representatives that they would not support a tax on agent commissions. Since, under the Florida Insurance Code, such a tax could not be passed along but would have to come out of commissions, they agreed that it would amount to an income tax, which is not allowed under the state constitution. We will keep a vigilant watch for any efforts to resurrect such a levy.

Finally, we plan to use this year's required review of exemptions to the public records laws to tighten a loophole we discovered regarding access to sensitive agent information filed with the state. Sink's office is working closely with us to more fully safeguard this information from the media and others.

Attorneys' Fees Battle Goes Into Overtime

By William H. Stander, assistant vice president and regional manager, Property Casualty Insurers Association of America

"Inevitably, the new law will become the target of repeated attacks, while the three-year reform effort will become fodder for the revisionists. Interested parties will start anew looking for loopholes, trying to game the system. Indeed, despite the best of intentions, no legislative proposal can hope to stand unadulterated by the vagaries of human nature and the passage of time."

- William Stander, Florida Underwriter, December 2003, commenting on the workers' compensation reform bill, SB 50A.

Well, the inevitable is here. In October 2008, the Florida Supreme Court dealt a major setback to the workers' compensation market by reinstating hourly attorneys' fees in its Emma Murray v. Mariners Health/ACE USA ruling. Once again, the insurance and business communities must come together and fight for what is right.

In December, the Florida Office of Insurance Regulation (OIR) released its 2008 Workers' Compensation Annual Report on the state of the market. The report described the market as competitive and healthy. As proof, it pointed to the low policy count in the Worker' Compensation Joint Underwriting Association, and trumpeted the overall average rate decrease of more than 60 percent since the successful 2003 reform effort. The report was right on target.

But now all of that is at risk. The Murray v. Mariners decision single-handedly reinstated one of the biggest cost drivers in the workers' compensation system. Unless corrected, the awarding of hourly attorneys' fees will severely undermine the positive impacts delivered by SB 50A by re-incentivizing claim churning and benefit-seeking behavior. This will naturally drive unnecessary increased costs into the system.

Prior to the 2003 reforms, the cost of litigated claims in Florida was 40 percent higher in Florida than in any other state. SB 50A eliminated claimants' attorneys' fees based on hours worked, and linked the amount strictly to the value of benefits secured through a sliding fee percentage schedule. The National Council on Compensation Insurance (NCCI) estimates that Florida employers have saved close to $2.9 billion in premiums since the bill took effect.

While eliminating hourly attorneys' fees was only one component of the reforms, PCI believes it was the most important. After the passage of SB 50A, NCCI filed, and the OIR approved, a "law-only" rate filing decrease of 14 percent. Ostensibly, this represented all the savings the market could expect from the legislation. Yet since that time, rates have continued to drop like a rock.

In our support of SB 50A, we said that eliminating the hourly fees would change claimant and claimant attorney behavior drastically, and that only experience would prove it — and it has.

Back to Square One

But now the court's decision has pushed us back to square one. Shortly after the ruling, NCCI made a new filing with the OIR, asking for an 18.6 percent increase over two years. In support of its filing, NCCI stated, "Because workers' compensation ratemaking is prospective only, insurers are not afforded the opportunity to recoup premium to cover such unforeseen increases in system costs. Therefore, it is expected that a significant unfunded liability will be created because of the retroactive impact of this court decision. NCCI has estimated the statewide (including individual self-insurers) magnitude of the unfunded liability at potentially up to $400 million."

The OIR rejected that filing, but ultimately approved a rate increase of 6.4 percent effective April 1 for new and renewal business.

Substantial efforts to reform the workers' compensation system come few and far between, and for good reason. Underlying all insurance is a reliance on stability and predictability. Frequent system changes prevent the orderly adjudication of claims and increase frictional costs. At the same time, participant gaming, conflicting court decisions, and over-litigation can turn an otherwise stable workers' compensation system into disarray.

It took three years of persistent and consistent effort by the Coalition of Business & Insurance Industry to convince the Florida Legislature to pass one of the best reform bills ever deliberated. Yet, in Murray v. Mariners, the Florida Supreme Court chose to substitute its judgment for that of the Legislature. Unless addressed during the 2009 regular session, the reintroduction of hourly attorneys' fees into the workers' compensation system will increase litigation and raise costs.

The Florida Legislature has a full plate this year. Budget issues and the slowing Florida economy will no doubt take center stage, but the Coalition of Business and Insurance Industry, of which PCI is a founding member, will be urging the Florida Legislature to say "we meant what we said when we said it the first time," and once again prohibit hourly attorneys' fees. Especially in these difficult times, Florida cannot afford anything less.

Will The Legislature Get It Right This Time?

By Mary Frederick, communications director, Professional Insurance Agents of Florida

The Florida Legislature must think that insurance companies and agents are made of rubber. That is, both must bend and bend, (but not break) while providing the best possible coverage at rock-bottom prices for their customers. The well-known problem in the homeowners' market is that hurricanes are inevitable — and with massive buildup of buildings along Florida's coastline (the longest in the continental U.S.), the risk is enormous.

Yet some legislators want to bend and stretch the property insurance market to their will. They keep tweaking Florida's insurance regulatory system so they can go home to their constituents with news of ever-lower insurance rates. But the only rate control they really have is with Citizens Property Insurance Corp., and in recent years they have directed Citizens to charge actuarially unsound rates, morphing it from a "market of last resort" to a de facto "market of first resort." Other companies, fed up with regulatory and rate limitations, have simply reduced their risk or left the state, shifting even more risk to Citizens.

Is it any wonder that State Farm is packing its bags? State Farm indicates it does not want to leave Florida but it cannot afford to stay, claiming it is losing an estimated $20 million a month in our state. While some regulators (and Gov. Charlie Crist) are saying good riddance to State Farm, these same regulators are also trying to mandate that State Farm limit its non-renewals to two percent a year. This doesn't make sense.

Some Sound Recommendations

Legislators did a positive thing in the 2008 session when they mandated the creation of a Citizens' task force to develop a report of statutory and operational changes needed to return it to its original mission of being the market of last resort. The task force developed a comprehensive report outlining suggested recommendations in time for the 2009 session.

The first and foremost recommendation was to implement Citizens' rate increases beginning in 2010. Actuaries have estimated that Citizens is facing more than $400 billion in potential exposure, yet it only has about $3.4 billion in net assets. Not only does this put all Floridians on the hook for Citizens' losses, but it also puts insurance agents in a terrible position: Do they place customers in Citizens to save some money, knowing that Citizens could be on the brink of financial disaster, or do they place the risk with another company that may or may not be properly funded?

Currently, agents are prohibited from discussing the Florida Insurance Guaranty Fund with their customers. This limits agents in their duty to provide important information so their customers can make wise insurance choices. The task force recommends repealing this onerous statutory language, and Professional Insurance Agents of Florida agrees.

The task force has some other far-reaching recommendations to curb Citizens' risk. The members recommend that any new structure erected on Florida's coast be ineligible for Citizens' coverage. Developers and coastal municipalities will not like that, but Florida, as the most hurricane-prone place on earth, should take steps to mitigate its overall hurricane risk.

In addition, the task force recommends that home-strengthening programs be developed and promoted. The popular My Safe Florida Home program exhausted its funding last year. We are not sure where additional money would come from to continue the program, but regardless, homeowners need to take the necessary steps (and assume the responsibility) to strengthen their homes.

Some Not-so-Sound

Other task force recommendations include a number of bureaucratic steps for agents that put them in a position of chasing after coverage that everyone knows is not readily there. Knowing that the devil is in the details, we hope that the Legislature weighs these carefully.

The recommendations include a series of provisions for agents to ensure that their customers are in fact eligible for Citizens — from certification of the 2007 "15-percent rule," reconfirmation of Citizens' eligibility every year for their Citizens' policyholders, and limiting automatic renewals. If the agent or the applicant violates any of the eligibility requirements, then the task force recommends that both can be fined or penalized. Let's not put agents in an even worse position by mandating that they spin their wheels, instead of ensuring that their customers are properly insured.

Other recommendations just do not take into account the fact that Florida's insurance market is extremely volatile. It sounds nice to recommend the elimination of Citizens' coverage of non-residential commercial properties, especially now that that market has opened a bit, but what happens if the market tightens again? The same thing goes for the recommendation that Citizens-appointed agents demonstrate their appointments with actively writing companies. That's an exercise in futility. Companies are very fickle in opening and closing of territories, and agents must bend with the market flow the best they can.

Let the Market Determine Rates

There's one recommendation that is beyond the scope of the task force, but that we hope our legislators will heed: It is time to let the free market come to the Florida insurance arena and allow companies to compete with one another with actuarially sound rates. We're sure that this basic principle of capitalism will ruffle the feathers of some legislators who promise their constituents low insurance rates, even at the risk of putting Florida in serious financial jeopardy. But the free market is the only way the Florida Legislature can reduce Citizens' market share, reduce the state's liabilities in the Cat fund and in the guaranty fund, and let insurance companies actually compete with one another. That's the only way our insurance market will stabilize, providing policyholders the best coverage and the best price.

Let's look at another coastal state's insurance market as a comparison. Louisiana's private property insurance companies can adjust their rates as necessary, and as a result their insurance market thrives. For the most part, Louisiana's last-resort insurance company cannot offer competitive prices. And guess what? The number of policies placed there continues to drop.

Agents, by Florida law, must act in "good faith… with respect to the public." Although an agent's fiduciary responsibility is not codified in Florida statute, it is clear that Florida agents are in a Catch-22 when placing coverages for their clients. Let's hope the Legislature will take the necessary steps to allow agents to actually act in good faith.